Law the Gop Should Pass #8: An Ideal Tax Policy Part II

So last time I proposed flat taxes on individual and corporate income. This has the advantage of making sure that when taxes are raised it can’t be claimed to be on one less than popular group or another (which hides the reality that a tax increase on anyone is pretty much in the end is going to be a price increase on what we all pay for, thus it’s a tax increase on all of us). But just flattening taxes on income isn’t enough. Those sneaky bastards will come up with lots of other things to tax and tariff, fee and surcharges. So how on earth do we stop them from hiding taxes, keeping income at a level that will allow the government to function, and making every tax equally apparent to everyone—notice I do not say equally a burden, as all taxes are already equally a burden on everyone since any tax on any group has a way through economics of slowing down the economic flow for the rest of us.

And the easy answer is that they can only tax one thing and one thing only. Sounds kind of like a no brainer doesn’t it (and yes I realize for this to have real force I’m not suggesting a law but a full on Constitutional change). And bear with me for a minute because I can almost guarantee you’re going to have a very quick knee-jerk reaction against this, but I’m pretty sure that on reflection you’ll be more open to this.

(Also please remember that last week I predicated all of this on the idea the Congress gets its spending problem under control, I’ll fully admit this will not work without A). Some kind of balanced budget amendment or at least agreement and B). Major cuts in all those unquestionably stupid and evil entitlement programs like welfare, social security, Medicaid and Medicare.)

We eliminate all federal taxes and replace them with a 10% sales tax. (I’ll give you a moment to stop screaming at me for being insane).

Okay, now let’s go over why this will not only work, it will work really, really well.

First, when I say a sales tax I mean on everything. Everything you buy (including food), gas, liquor, movie tickets, soda, your car, you new computer, and every service, the electric bill, the water bill, the telephone bill, the oil change at the dealership, hiring a maid, hiring an outside company to do a service for your company, any sale of stock. Everything. Every item sold, every service sold. (The salaries of employees are not counted in this).
You will recall that I suggested last week that everybody’s income tax or corporate tax go to 10% so if you spend pretty much all of your money on goods and services your income has roughly changed by nothing. So this change should not become a burden to anyone.
However, psychologically it will make a huge difference. If the tax burden is right there for people to see every time they make a purchase you will see people spend less and save more. In the long term people will have more saved up, thus making the need for social security less required. If it is purchases and not earnings that are taxed people will have more incentive to earn and incentive to spend. Granted this will have some ripple effect in our very consumer based economy but they will likely be for the good.
One of these effects is that you will likely see people become more self sufficient. Rather than pay 10% sales tax on every item of food it’s better to pay it on some seeds and grow your own food. Further you will likely see people barter more and spend less, a system that requires people interact with each other, which counters a lot of the isolation that modern society is bringing. And with greater social interaction you will find society not becoming so dependent on the government.
This law needs to be made that while it cannot go above the 10% limits (except in time of war) that if the government actually has a surplus then the next fiscal year’s tax rate goes down by a percent to 9%…two years of surplus goes down to 8% so on and so forth. What this point will do is it will encourage everyone to demand that government cut back on all of its useless spending. Right now you don’t really see an effect if government cuts back on this or that…if you had actual incentive to demand that the government cut back its spending because it will make an actual difference on all your bills, trust me people will demand for less and less government spending.
I figure after a couple of decades of this the actual tax rate will settle down around 7% and the government will be kept in check by a constant stream of people who do not want their bill to get too high.
Now you might wonder what about the money we made from corporate taxes. Well they’re still paying taxes, but only on the things they buy, thus encouraging companies themselves to become more self-sufficient, which means there will be a check against almost every corporation outsourcing its accounting to Arthur Anderson (or whatever replaced that corrupt institution to have to offer a much better, and certainly more honest, product).
Won’t a 10% tax on every stock trade hurt the stock market? Nope. It will actually cut down on the insanity of day trading, cut down on the exuberance that creates bubbles and it will encourage much more long term trading because if you’re going to pay 10% right at the start of you purchase of a stock you’re going to make damn sure the sale will pay for itself over the long run. (Consider that almost all capital gains taxes right now are at 10% so this really is actually going to encourage more investment, not deter it).
I can see that there might be a lot of other objections to this, and I’m not saying there won’t need to be little adjustments needed to a plan that is more or less given in outline here, but I believe this plan, in the long run, would be the most beneficial and logical for an economy.

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5 Comments

Filed under Capitalism, Economics, Laws the GOP should pass

5 responses to “Law the Gop Should Pass #8: An Ideal Tax Policy Part II

  1. Cris, consider the disincentive a transactional tax, such as a sales tax, creates. If you are proposing taxing the transaction of reallocating capital to more productive areas, you are creating a disincentive to do so. This is the argument for lower capital gains taxes. Lower CG taxes 1) increase the real rate of return on any capital investment and 2) lower the cost of reallocating that capital from a poor performing investment to a better performing investment. By the way, the highest capital gains rate in the US right now is 15%. It is not the lowest rate.I agree with your points of transparency and lack of numerous exemptions for certain industries. However, a combination of types of taxes that focus on proper incentives for actions and not industries or constituencies would be more beneficial. I would also like to point out that barter transactions would not escape a tax on transactions. There is no tax system in the US that exempts barter transactions from tax. They are simply non-cash exchanges. Establishing the value of this exchange can sometimes be tricky, but the exchange of value is still taxed currently for sales and income taxes and rightly should be. Otherwise, you are simply providing an incentive to move activity off the books. The transaction cost of trying to establish a relationship with anyone who has something you need far outweighs the tax savings at 15%. If you exempted barter, you would find exchanges popping up and establishing their own currencies to circumvent your tax system, which would defeat your purpose of social interaction (if I understand you correctly). Anyway, I'll stop now.

  2. Tony, the statement about the highest CG rate was supposed to say " are at 15%" not "above 15%" thank for pointing out the typo as it does change the meaning quite a bit.I fully have considered the disincentive this creates on materialism, which at the same time takes away a good portion of the disincentive of earning and investment that income tax creates.I would admit I'm the most hesitant to have a sales tax on the stocks, but I do not want separate tax systems, and since the tax would be on the front end of the purchase instead on the back end, a stock holder has more incentive to research before buying and a greater interest in voting at shareholders meeting and making the boards and CEO accountable. Also as dividends would not be taxable under this system, shareholders would be more concerned with making profits (long term growth and stability) over simply driving the stock price up (what's behind many of the boneheaded decisions of the last 2 decades).As to private bartering, I would disagree with you that the government necessarily has any right to tax any exchange of small goods between individuals (are you putting my Christmas present to you and Amelia this year on your income?) I want what would more or less be underground systems of exchange to develop, the more people deal with each other, the less they feel the need to rely on the government. (Keep in mind also the context of the paragraph where I'm talking about people growing their own gardens to avoid paying taxes on fresh food; I'm talking about small transactions). Now granted larger non-cash exchanges will be taxable (maybe set the limit at under $1,000). Business would still be required by law to deal in cash; the sales tax is quite literally the cost of business so I don't worry too much about black market commodities markets, as now the IRS will have no one to torment but business owner and their receipts.

  3. You've clearly thought it through. I don't agree, but that is not likely to change. To address your question, receiving a gift is (under current tax law) specifically excluded from income. I will say, I think you are terribly naive to believe that if non-cash systems of exchange are developed that businesses will not make use of them. Businesses already do a fair amount of barter, especially small contractors. I could provide numerous other examples, but I don't have the time. Sorry:). Your idea may be moving in the right direction though.

  4. And I'm not entirely sure that it will work either, I know of nothing comparable in actual practice to put this up against. This is why I wanted a flat income and corporate tax to be put in place first…that way, if while you transition slowly into this, if it clearly isn't working, we can still fall back on the flat taxes. Just in the theoretical I think this moves the incentives to the best parts of human nature, and as I am an optimist I tend to feel it will work.

  5. Pingback: Paul Krugman shows you can win a Nobel and not know any math | The Conservative New Ager

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